Category: Socializing Losses

Saturday Soother – July 28, 2018

The Daily Escape:

Quote by John Maynard Keynes posted on the wall at the School of Economics, St. Petersburg State University, Russia – 2018 photo by Conor Morrissey

Welcome to the weekend. US GDP hit 4.1% for the second quarter of 2018. Trump was out there on Friday saying that the economic winning has only just begun, and that it’s due to the GOP tax cuts, and his moves to impose tariffs on our trading partners. He neglects to mention this year’s $1 trillion budget deficit that he and the GOP created. That’s what’s fueling our current growth, and it won’t last.

Speaking of tariffs, NPR reports that US ham and other pork products now face very high Chinese tariffs of between 62% and 70% after retaliatory tariffs by China. What happened next shouldn’t be surprising:

In recent weeks, the US Department of Agriculture has reported zero weekly export sales of pork to China….So our exports to the country have pretty much collapsed.

Does this mean cheaper bacon for America? As we have heard, “Trade wars are good and easy to win”. Apparently, the Stable Genius can bring home the bacon, but he can’t sell it abroad. Thoughts and prayers to all the pork producers who got conned.

US farm subsidies were about $23 billion last year. A year ago, the Trump administration proposed a $4.8 billion cut to that. Now he’s increasing the subsidy by a one-time $12 billion to make up for the effects of his tariffs.

OTOH, in the EU, farm subsidies for the 2021-2027 period are scheduled to be reduced by five percent to $420 billion. Maybe there will be some additional winning for our farmers, assuming we can export more to the EU. But the US isn’t above criticism: US dairy producers now have a whopping 1.39 billion-pound surplus of cheese; 4.6 pounds per American. Wrongo is doing his part to cut into the surplus, what about the rest of you?

And at the same time there is overproduction, there’s growing risk to our health due to overuse of antibiotics on dairy farms. America shouldn’t give up its food security and become dependent on other countries, but it’s time for clear(er) thinking about our agricultural policy.

The big news on Thursday night was that Trump’s former attorney, Michael Cohen, is now saying that Trump knew beforehand about the June 2016 meeting between his top campaign staff, his son and Russians promising dirt on Hillary Clinton. If true, it would add a lot to a case of Trump obstructing justice.

We’ll see if Mueller ever makes a case in the court of justice, vs. only in the court of public opinion.

Are you fed up yet with being told “what you’re seeing and what you’re reading is not what’s happening”? Or having Trump say that Putin is a good guy? Or, that North Korea is no longer a threat, that Canada is our enemy? Or, that some black football players hate America? Or, that immigrants are ruining everything? That our allies are out to get us, and there was no collusion!?

This takes Wrongo back to Cohen. Maybe he has the lead-up to the June meeting on tape as well.

In any event, we’ve closed the book on another hard week. Time to kick back, get soothed, and stare vacantly at all of the yard work we aren’t getting around to doing.

To help you relax, let’s open a cup of Martinez, California’s States Coffee & Mercantile’s new Reserve Cold Brew ($12/24oz. bottle). It is brewed from Tanzania beans, and is a ready-to-drink bottled black coffee. The brewer says it is richly sweet, with an umami undercurrent, and that adding whole milk mediates the umami impression, while amplifying the chocolate and spicy floral notes.

Wrongo says, go for it! Add ice and milk, and chug a couple to get your day started.

Now, settle back and listen to Ana Vidovic playing “La Catedral” by AgustĂ­n Barrios MangorĂ© on solo guitar. MangorĂ©, who died in 1944, was a Paraguayan virtuoso guitarist and composer, regarded as one of the greatest performers on the guitar. “La Catedral” is considered one of the most colorful, and difficult, works in the guitar repertoire. It is Barrios’ tribute to Bach:

Those who read the Wrongologist in email can view the video here.

Facebooklinkedinrss

We Won’t Manage Our Water Resources

The Daily Escape:

Louvre, Paris – 2017 photo by Brotherside

Let’s leave North Korea and the G-7 for others to worry about. Wrongo suggests that you read “Crisis on the High Plains: The Loss of America’s Largest Aquifer- the Ogallala” from the University of Denver’s Water Law Review. Here’s the key section:

The Ogallala Aquifer supports an astounding one-sixth of the world’s grain produce, and it has long been an essential component of American agriculture.

This isn’t new news. There were plenty of environmental writers in the 1980’s and 1990’s highlighting the depletion of the Ogallala Aquifer as the biggest single threat to world food supplies.

The Ogallala is an interconnected series of water bodies, not one single geological water body. That implies that the last drop extracted from a New Mexico well will not cause immediate drought in Nebraska. But it is still possible that catastrophic depletion could occur over a tight enough timescale to cause a major disruption of US food supplies, especially in light of climate change. Here is a map of the Ogallala that shows the depletion of water from about 1950 to 2015:

Source: USGS SIR 2017-5040

Sadly, the prospect of the US managing our water resources seems well beyond our will and ability. We also see this in California, where the aquifers in the Central Valley are being depleted by farming.

Most of the time, the primary cause of water depletion is the decision of farmers to grow crops which are unsuitable for the local climate, invariably for financial reasons. The only true solution is a long term retreat from high water demand crops grown in semi-arid areas, in favor of growing them in more suitable areas.

And who are these farmers?  We know about the corporate farms in the Midwest, but some farmers are actually foreign countries. This from NPR: (emphasis by Wrongo)

Outside of Phoenix, in the scorching Arizona desert, sits a farm that Saudi Arabia’s largest dairy uses to grow hay for cows back home. That dairy company, named Almarai, bought the farm last year and has planted thousands of acres of groundwater-guzzling alfalfa to make that hay. Saudi Arabia can’t grow its own hay anymore because those crops drained its own ancient aquifer.

More:

They got about 15 water wells when they purchased the property. Now, each one of those wells can pump about 1.5 billion gallons of water. It’s an incredible amount of water they’re going to be drawing up from that aquifer underground…

The remarkable thing about this Saudi Arabian company is that it did the same thing in Saudi until the water ran out. The aquifers they used to grow hay and alfalfa at home simply went dry, and the Saudi government told its dairy companies to start importing hay from elsewhere.

It turns out that hay yields in the desert are the best in the US. You can literally get three or four times as much hay growing in the desert because you have a very long growing season: It’s hot, so the hay dries really quickly once it’s cut. It turned out this was such a good idea, the UAE decided to buy a farm in Arizona too.

America has already given away our manufacturing capability, and thereby created the rust belt. Now, we’ve decided to “export” our water.

Saudi Arabia’s amber waves of grain. Because, “free trade.”

The Ogallala article mentions that, if everyone immediately reduced their usage by 20%, the aquifer should last another 100 years. That’s the generation of Wrongo’s great-great-grandchildren (as yet unborn).

Not much time if you think that the Ogallala has been with us for 10,000+ years.

If we believed that the water resource should belong to those who must pay to replenish and renew it, rather than to those who can monetize it most profitably, our property rights laws would have to be different.

But we don’t, and they aren’t.

Our culture is predatory.

When the spoils are eaten, there is no more. Who will we turn on then?

Facebooklinkedinrss

Monday Wake Up Call – June 4, 2018

The Daily Escape:

The Blue Grotto, Malta – photo by SingularET. Not to be confused with THE Blue Grotto on Capri, the hangout of the Roman emperor, Tiberius.

NewdealDemocrat over at Angry Bear raised a few excellent points about historically low unemployment and stagnant wage growth: (emphasis by Wrongo)

As I noted several weeks ago, even though we are at least closing in on full employment, the percentage of employers not raising wages at all has gone up in the last year:

(The blue line is the percentage of employers who have not increased wages. The grey shaded areas are recessions.)

There was more bad news from Axios , reporting on a meeting with the Dallas Federal Reserve about how big companies aren’t planning on raising wages at all:

The message is that Americans should stop waiting for across-the-board pay hikes coinciding with higher corporate profit; to cash in, workers will need to shift to higher-skilled jobs that command more income.

Troy Taylor, CEO of the Coke franchise for Florida, said he is currently adding employees with the idea of later reducing the staff over time “as we invest in automation.” Those being hired: technically-skilled people. “It’s highly technical just being a driver,” he said.

The moderator asked the panel whether there would be broad-based wage gains again. “It’s just not going to happen,” Taylor said. The gains would go mostly to technically-skilled employees, he said. As for a general raise? “Absolutely not in my business,” he said.

John Stephens, chief financial officer at AT&T, said 20% of the company’s employees are call-center workers. He said he doesn’t need that many. In addition, he added, “I don’t need that many guys to install coaxial cables.”

The Civilian Non-Institutional Population (those who the government tracks for jobs analysis), grew 21.3% between April 2000 and April 2018, yet, full-time jobs grew only 11.7%. This means that we can’t possibly be at full employment, despite the government’s headline unemployment rate of 3.8%, the lowest since 2000.

And if most employers are thinking like those at Coke and AT&T, wages won’t increase, despite the country’s nine-year economic recovery. If wages will not be increasing, where do employers think increased demand will come from? And, if companies are freezing wages during the supposed good times, what will happen when times turn bad?

Corporate policies are designed primarily to respond to the requirements of its management and its institutional shareholders, not employees. Employers’ profits have been increasing steadily, but the wealth keeps getting transferred upwards. And it’s the employers who are responsible for layoffs, and who use other methods to increase profits, such as automation, which leave the surviving workers in an increasingly poor negotiating position when it’s time for the annual raise discussion.

Do workers “deserve” an annual increase? By performing their jobs, workers produce value for the company. If a company is profitable, workers should get a cut, and if profits go up, so should their share.

If a particular individual isn’t performing well, then in an efficient/well-managed company, they’ll be replaced. If the job itself is not structured to produce effectively, in an efficient/well-managed company, the job will change. And if the company fails to do either, then in an efficient/well-managed company, the company will change, or it will fail.

It appears that with their paltry increases, workers are losing ground. Rents are rapidly rising in most cities. Wrongo saw a story about a New York City couple who moved from Brooklyn, NYC to Westport, CT for cheaper housing. It wasn’t many years ago that Westport was substantially more expensive than Brooklyn. In fact, it was once the home town of Paul Newman and Martha Stewart.

Many workers are fighting for a 2% raise. (Remember, 2.6% is the average, which means many workers are getting less than that). Factor in the rising rents, food costs, and health care insurance, and you can see that the average hourly worker has little chance of upward mobility.

Is this an inevitable outcome caused by Mr. Market? Not really. Our government has its thumb on the scale via tax benefits to corporations, combined with a Federal minimum wage that is impossibly low.

Time to wake up, America! We must stop letting corporations hoard the profits! Capitalism is institutionalized avarice. Its purpose is concentration of power. And one outcome is the spreading of economic misery.

To help you wake up, here is the Soup Nazi who, says, “No soup for you! Come back 1 year!” Just like many employers say when hourly employees ask for a raise.

Those who read the Wrongologist in email can view the video here.

Facebooklinkedinrss

It’s Past Time To Make Changes To Our Economic System

The Daily Escape:

2011 Art piece by Steven Lambert

Does capitalism work for you? Well, you certainly work for capitalists. The real question is whether capitalism still provides economic security to all of us.

Steve Lambert, the artist who designed the sign, engaged with people across America over a three-year period about whether capitalism was still working. He learned that people were split about 50/50 on the premise:

People usually first react to the piece by falling back on the comfort of abstractions and repeating popular myths. For example, the true/false dilemma is much easier to resolve when the only alternatives to capitalism are presumed to be failed communist dictatorships. It’s also much easier to pretend that the only “true” definition of capitalism is the kind of free-market extreme idolized by thinkers like Ayn Rand and Friedrich Hayek

Or thinkers like Paul Ryan, Mitch McConnell and Donald Trump. Lambert learned that people generally agreed with the concept, assuming “you are willing to work hard, or work smarter”:

I’ve always found the formulation “work hard, work smart” disturbing. When you invert the expression, it implies: if capitalism doesn’t work for you (that is, if you’re poor, out of work or have a demeaning job), it’s your fault. To put it more bluntly, you are lazy and stupid.

If we ignore the fact that until recently, wages have stagnated for decades, and that what most people earn in a lifetime is insufficient to cover a modestly comfortable retirement, maybe you can say that capitalism is working.

We have been told that federal budget deficits impair our ability to grow the economy, or to put food on our individual tables. In fact the opposite is true. This idea makes us believe that our ability to earn a living requires some degree of suffering by other Americans.

As Claire Connelly says: (emphasis by Wrongo)

“We can’t afford it” has been the proverbial comforter of opponents of the welfare state harking back to the Clinton / Blair days….This argument has been used as an emotional crutch for people who don’t want to admit that they’re comfortable with homelessness and unemployment….If their bottom line is stable.

This lie sets us against each other, implying that the well-being of everyone else is a direct threat to our own. And who wins? The beneficiaries of the newly lowered taxes, corporate America and its management teams. More from Connelly:

Do we really want to live in a world….Where most people will be lucky to earn minimum wage, or wait for months to get paid. If at all. A world where we are not entitled either to a job, or an education, or affordable health care or a social safety net?

We are likely to see a $1.3 Trillion budget pass both houses of Congress this week. It is deficit spending run wild. Wrongo knows that both parties believe that deficits don’t matter, and to a great extent, he agrees.

But these deficits are larger than they had to be, due to the massive corporate and wealthy individual tax cuts the Republican House and Senate just passed. And it’s not only the size of the deficits, it’s the mis-allocation of funds by our neo-con overlords.

This is what capitalism has delivered for America: More than 45 million of us (14.5%) live in poverty. In 2016, another 49.5 million Americans were age 65 and older, and half of them (24.75 million) had yearly income of less than $23,394.

That adds up to about 70 million (22%) of Americans.

One idea that is gaining attention is a Jobs Guarantee program. The Center on Budget and Policy Priorities (CBPP) recently released a paper arguing for a national jobs guarantee through a national infrastructure bank. The CBPP plan envisions an infrastructure bank that would fund vital projects and ensure that jobs are well-paid. The government would use this job-creating ability to expand jobs in sectors where the market won’t currently invest, like a national high-speed internet network.

Government guarantees of employment aren’t radical. They aren’t communism, or socialism. We did it before with the New Deal. It reinforces traditional American values around work, and it builds the tax base by taxation on the jobs created. Here’s a final quote from Steve Lambert:

My favorite response to the sign was from a 17-year-old high school student in Boston. She said: “Capitalism can’t work for everyone. If it did, it wouldn’t be capitalism.”

This is where the conversation needs to go: We have to change an economic system that fails so many.

Facebooklinkedinrss

Will Tariffs Bring Prosperity?

The Daily Escape:

Detail of art painted on a truck, Pakistan – 2017 photo by Caren Firouz. South Asian “truck art” has become a phenomenon, inspiring gallery exhibitions.

Will new tariffs help our economy? The view of a typical Trump supporter:

Some of us are happy about these tariffs because it starts a long overdue conversation about trade: Everyone knows that the press, congress, economists, and the multinationals love existing policy, and that most of them couldn’t care less about trade imbalances. If this is the only avenue our democracy has to change trade policy, then we’re all for it.

Yet, the conventional wisdom is that Trump’s tariffs on steel and aluminum will do more harm than good. There are several concerns. To the extent we need steel and aluminum to use in our domestic production, it will cost more, and prices will have to go up, assuming that the manufacturers are unwilling to lower their profit margins. Ultimately, those increased costs hit the American taxpayer.

Another concern is retaliation. Our trade partners can block our exports, or charge retaliatory import tariffs of their own. Just 12% of US GDP are exports, so we’re less exposed to that threat than other economies that have a larger percentage of their economies dependent on exporting. However, jobs can be easily lost if China, Brazil, or the Euro Zone block some of our exports.

Trump’s rationale for new tariffs is two-fold. First there is a national security risk caused by diminished capacity in sensitive industries. Second, good jobs will come back to America if we produce more stuff.

Let’s deal with national security first. No doubt we have surrendered some of our strengths in sensitive products and technologies. But, it’s not a critical issue for steel or aluminum. We can get them from many countries that are currently our allies.

Artificial intelligence, advanced semiconductors, and software are an entirely different matter. There are legitimate national security-based rationales for restriction in those areas.

But, we are in trouble with some of the exotic steels that the Defense Department uses in weapon systems. For example, the Belgian firm Fabrique Nationale is the prime contractor for a lot of the high end small arms. Some of these specialty steels are only manufactured in annual production lots. Trump’s tariff won’t shift the production of those exotic steels to domestic sources.

So even in the few cases in which a tariff might serve a national security purpose, the Trump tariff will fail.

And while the Chinese dump steel below cost on global markets, most others (Canada, Brazil) do not, and we buy a lot more from them than we do from China. And there is no scenario whereby Canadian steel exports are a “national security” risk, Trump’s primary rationale. And the Trumpets seemingly can’t see the difference between primary aluminum (China exports nearly none) and semi-manufactured aluminum products, such as bars, plates, and wire rod, which they export a lot.

But, don’t foreign governments subsidize their steel industry? China does. However, that means that China is essentially giving us cheap steel. The question for Trump is: Will we gain enough jobs in our domestic steel industry to outweigh the losses to us in higher prices across all industries?

Maybe, but it hasn’t worked that way in the past.

Tariffs help lazy and/or incompetent businesses. Imposing new tariffs will just put off the day when the toxic combination of bad management, lack of investment, poor infrastructure, and bad government causes these protected industries to implode.

If you are a manufacturing company that is internationally competitive and well run, how would you like it if your steel and aluminum suddenly became 25% more expensive? All to protect some other lazy SOB who hasn’t invested in his plant in 20 years?

The correct response should be to find out why your product isn’t competitive, and then fix it. Much of American industry has done that, by automating, by moving abroad for cheaper labor, or to be closer to raw materials.

Ultimately, Trump’s tariffs will just postpone the day when our uncompetitive sectors must modernize, or go under.

And that result is always a net loss of jobs.

The best think tank idea is to establish tariffs (or quotas) based on the amount industries pay their labor in foreign countries vs. what US employers pay. If the foreign country’s prices are lower, than a tariff would kick in. This would help us with US firms who manufacture overseas. They would have the choice of paying higher wages to US laborers, or paying a tariff on their imports to the US.

Trump’s message is: If you want unfettered access to the US market, make it here. If the US consumer pays more, that is a price he’s willing to take to have the manufacturing base.

This is a debate worth having.

Facebooklinkedinrss

Rural Towns Have Polluted Water. Will Trump’s Plan Fix It?

The Daily Escape:

Valley of Desolation, Eastern Cape, South Africa – 2018 photo by Ottho Heldring

The Trump infrastructure plan asks states and cities to partner with private equity to build their roads, bridges and water treatment plants. As the WSJ explains, private equity says they are not interested. Apparently, they don’t want to build things; they prefer to purchase existing assets: (emphasis by Wrongo)

Fund managers say they are mainly looking for assets that are already privately owned—such as renewable energy, railroads, utilities and pipelines—and not the deteriorating government-owned infrastructure like roads and bridges that helped attract the capital in the first place. To the extent they are interested in public assets, the focus is more likely to be on privatizing existing infrastructure than on new development—the heart of Mr. Trump’s push.

One area where private equity may think they have a role to play is with America’s threatened water systems, which are existing assets. When people think of water crises, they think of places like Flint, Michigan, because a failed urban water system affects huge numbers of people. If you’re worried about the quality of your drinking water, take a look at https://waterfilterway.com/.

But most health-based violations of drinking-water standards occur in small towns. Of the 5,000 US drinking-water systems that racked up health-based violations in 2015, more than 50% were systems that served 500 people or fewer.

But when we add up the total number of people affected, rural America’s drinking-water situation is an order of magnitude greater than Flint’s. Millions of rural Americans are subject to unhealthy levels of contaminants in their drinking water, largely from agriculture and coal mining.

And as the rural/urban economic gap grows, this basic inequality won’t get fixed unless something radical is done to improve water quality in rural America.

Agriculture is the culprit in many rural towns, and unhealthy levels of nitrates is the primary cause. Nitrogen-based fertilizer runs off of farmlands and into the nation’s fresh water. The health impact of ingesting nitrates is serious:

  • Two-thirds of communities with nitrate levels at or above 5 ppm are in 10 states where agriculture is big business.
  • Almost three-fourths of communities whose drinking water is at or above the legal limit are found in just five states – Arizona, California, Kansas, Oklahoma and Texas.

Remediation costs vary, but a 2012 report from the Center for Watershed Sciences at UC Davis gives a yardstick. They say that a community of just under 5,000 people could incur annual costs ranging from $195,000 to $1.1 million to build and operate an ion exchange system, while a reverse osmosis system would cost from $1.1 million to $4 million a year. A $4 million system would cost $800 per citizen.

These costs may be far beyond the ability of small towns to finance. What is really going on here is another case of “socializing losses”. Farms are polluting the water, and the town is left to pay for remediation. And the big agriculture lobbies are making sure that their members avoid any liability for poisoning their towns.

We know that we haven’t been able to fund Flint’s water remediation with public funds. How will we deal with the rest of America’s polluted drinking water? It isn’t likely that towns and cities can do much more. Some cities have debt capacity, the capital markets may be willing to lend to them. However, hostility to new taxes on the local level means that issuing new debt is difficult politically for mayors and town councils.

Trump’s infrastructure plan opens up the Clean Water State Revolving Fund (CWSRF). This federal financial assistance program for water infrastructure projects would allow private firms to both manage and repair water infrastructure at taxpayer’s expense. Previously, only states and municipalities could access the fund.

Funneling CWSRF funds to private water system providers means our most vulnerable towns will have to turn over basic infrastructure to for-profit companies. And those companies will charge for the privilege. On average, private for-profit water utilities charge households 59% more than local governments charge for drinking water, an extra $185 a year.

When your water is poisoning you, should you agree to raise water rates to fix it, or do you expect to get pure water for the money you are already paying?

What if you are unable to move to a place where the water is safe?

If your water system will cost $ millions for a town of 500, how can it possibly be paid for, except by public funding?

Facebooklinkedinrss

Automation Will Cost 75 Million US Jobs By 2030

The Daily Escape:

Torres Del Paine National Park, Patagonia, Chile. Torres Del Paine is known for its mountains, glaciers and grasslands that shelter rare wildlife like Guanacos.

Wrongo has written many times about automation taking jobs that will not be replaced onshore. McKinsey & Co. has a new study that finds that job losses due to automation will take out anywhere from ten to twenty percent of the current global workforce by 2030:

As many as 800 million workers worldwide may lose their jobs to robots and automation by 2030, equivalent to more than a fifth of today’s global labor force.

The report covers 46 countries and more than 800 occupations. The McKinsey Global Institute study found that even if the rise of robots is less rapid than they expect, 400 million workers could still find themselves displaced by automation and would need to find new jobs over the next 13 years. McKinsey said that both developed and emerging countries will be impacted. Machine operators, fast-food workers and back-office employees are among those who will be most affected if automation spreads quickly through the workplace. Bloomberg made a chart summarizing the jobs lost by country:

Source: Bloomberg

This implies that some 75 million jobs are at risk in the US by 2030, to be replaced by…something.

The bottom line is that many of the unemployed will need considerable help to shift to new work, and as a result, starting salaries will continue to flat line. McKinsey paints a rosy picture about the future jobs market post-automation. They say that the economies of most countries will eventually replace the lost jobs, but are a little unclear on what the new jobs will be. They mention health care, infrastructure, construction, renewable energy and IT as likely job areas.

But the challenge is how the displaced workers learn the new skills necessary by 2030. Axios quotes Michael Chui, lead author of the report on the needs for retraining:

We’re all going to have to change and learn how to do new things over time…It’s a Marshall Plan size of a task…

How will America fund a Marshall Plan for retraining 75 million of us, particularly when we’ve just given the very corporations who are automating our jobs even more of a break on their tax bills? It’s unlikely that the Republican-controlled Congress will have any desire to fund the necessary comprehensive re-training effort. If Congress had any foresight, they could have made their new corporate tax cuts conditional on these same firms paying for the job retraining that their automation will cause for American workers.

But, it will be our job to figure out where these new training funds will come from, right along with the funds we have already given to the job creators Republican donors.

And what if you don’t have the money or learning aptitude to acquire these new skills? Well, you are likely to be both unemployed and poor. And that mean tens of millions more Americans will not have the resources to stay out of poverty.

Perhaps CEOs and Congresscritters ought to remember that there are enough guns for every man, woman and child in this country, and many are in the hands of the very people who would be hurt most by automation.

We can’t hold back the tide of automation, but we can be smart about how we, as a country make the transition to fewer very highly-skilled workers and many narrowly-skilled workers. There are questions to ask, and solutions to craft for the post-2030 world.

How will America’s forgotten workers survive in a society that is led by people who don’t care if they have a job?

How will America’s forgotten workers survive if the political establishment tries to unwind the social safety net while celebrating the progress of technologies that cost jobs?

That could lead to torches and pitchforks.

Facebooklinkedinrss

Here Comes the Retail Apocalypse

The Daily Escape:

The Oberlausitzische Library of Science, Gorlitz Germany

There is a growing concern that the mall as we know it is in big trouble. RadioShack, The Limited, Payless, and Toys“R”Us were among 19 retail bankruptcies this year. From Dave Dayden: (brackets by the Wrongologist)

This story is at odds with the broader narrative about business in America: The economy is growing, unemployment is low, and consumer confidence is at a decade-long high. This would typically signal a retail boom, yet the [retail store] pain rivals the height of the Great Recession.

Many point to Amazon and other online retailers as taking away market share, but e-commerce sales in the second quarter of 2017 were 8.9% of total sales. There are three reasons for so many sick retailers.

First, while online sales are “only” 8.9% of total retail sales, these businesses have very high fixed costs and low net profit margins. The Stern School at NYU tracks net profit margins on thousands of businesses across many sectors, including retail. The margins for Specialty retail for the year ending January 2017 was 3.17%. It was 1.89% for Grocery and 2.60% for General retailers. If a high fixed cost business loses 9% of sales, it can easily wipe out the bottom line.

Second, many retail companies carry high debt levels. Bloomberg explains that private equity firms (PE’s) have purchased numerous retail chains over the past decade via leveraged buyouts, where debt is the primary source of the money used to buy the business. There are billions in borrowings on the balance sheets of troubled retailers, and sustaining that load is only going to become harder if interest rates rise.

Third, there are just too many stores in our cities and suburbs to sustain sales in a world where online shopping is growing rapidly.

Worse, billions of dollars of that PE-arranged debt come due in the next few years. More from Bloomberg:

If today is considered a retail apocalypse…then what’s coming next could truly be scary.

This chart shows what percentage of retail real estate loans are delinquent by area:

Source: Trepp

There are large areas of America where more than 20% of the loans are past due. More from Bloomberg: (emphasis by the Wrongologist)

Through the third quarter of this year, 6,752 locations were scheduled to shutter in the US, excluding grocery stores and restaurants, according to the International Council of Shopping Centers. That’s more than double the 2016 total and is close to surpassing the all-time high of 6,900 in 2008…Apparel chains have by far taken the biggest hit, with 2,500 locations closing. Department stores were hammered, too, with Macy’s Inc., Sears Holdings Corp. and J.C. Penney Co. downsizing. In all, about 550 department stores closed, equating to 43 million square feet, or about half the total.

This threatens the retail sales staff and cashiers who make up 6% of the entire US workforce, a total of 8 million jobs. These workers are not located in any one region; the entire country will share in the pain.

These American retail workers could see their careers evaporate, largely due to the PE’s financial scheme. The PE’s, however, will likely walk away enriched, and policymakers will share the blame since they enabled the carnage.

Our tax code makes corporate interest payments tax-deductible. So the PE kingpins load up these companies with debt and when they walk away, they get tax credits for any write-offs, incentivizing them to borrow and play the game again. The PE firm might lose some or all of its equity, but in most cases, it already drew cash out via special dividends and fees, so it has made its money.

The lenders, employees, state development authorities are the ones left holding the bag.

The GOP’s new tax plan proposes a cap on the deductibility of interest payments over 30% of a company’s earnings. But, the GOP left a loophole: Real estate companies are exempt from the cap.

Surprisingly, this benefits Donald Trump’s businesses! It also helps PE firms that split the operating side of the businesses they buy from the property side, as most do. They put the borrowing onto the property side, and continue to deduct the interest.

So financialization businesses like PE will continue to strip the value out of companies with hard assets.

Billions in asset-stripping and thousands of operations sent overseas. Labor participation rate is stagnant, yet we are assured that if we pass big corporate tax cuts, the US economy will grow fast enough to more than compensate for the losses.

What’s wrong with this picture?

Facebooklinkedinrss

Saturday Soother – October 7, 2017

The Daily Escape:

Naiman Nuur (Eight Lakes) National Park, Mongolia. The lakes are just 22 miles from the Orkhon waterfalls, but are accessible only by hiking, or by horse. You can get to it with 4 wheel drive vehicles, but it is 80+ miles one way, 160 if there are heavy rains. You are probably never coming here.

Rick Perry heads Trump’s Department of Energy, (DoE). With the Russians, nuclear war with North Korea, ditching the Iran deal, and hurricanes, we have ignored Perry. But Perry hasn’t ignored the coal industry Trump hired him to protect. The DoE has asked the Federal Energy Regulatory Commission (FERC) to begin the rule-making process to subsidize coal and nuclear plant operator’s costs and profits. From Vox:

Perry wants utilities to pay coal and nuclear power plants for all their costs and all the power they produce, whether those plants are needed or not.

This takes a brief unpacking. The DoE did a study of power grid reliability that said:

The loss of coal plants had not diminished grid reliability; in fact, the grid is more reliable than ever. Reliability can be improved further through smart planning and a portfolio of flexible resources.

Then the DoE said to FERC: Address a crisis we determined doesn’t exist. They are asking FERC to adopt a rule forcing utilities in competitive energy markets to pay the full cost of plants that have 90 days’ worth of fuel on-site. Perry’s argument is that the levels of renewable energy produced from wind and solar is variable. And since backup is needed for days with calm winds or cloudy skies, we need to preserve the aging coal and nuclear plants to protect the power grid from dips in availability, because they alone among electric power sources, have 90-days of fuel on hand.

Perry’s contention is that coal and nuclear stored fuel is necessary for grid reliability, and, that these plants are unfairly being driven out of business by subsidies to renewable energy. This is patently false. It is cheap natural gas that is driving coal out of business.

Having fuel on-site does little for grid resilience. No one expects energy outages if coal and nuclear plants continue closing. But, let’s have more corporate welfare for the least useful part of the energy industry!

Perry’s alleged problem isn’t real, and his solution, subsidizing coal and nuclear plants, is a form of theft. A transfer from the most deserving, clean renewable and safe plants, to the least deserving, most polluting and dangerous coal and nuclear plants.

And people will be taxed through artificially higher electricity rates to subsidize coal and nuclear plants. More from Vox:

It’s hard to overstate how radical this proposal is. It is wildly contradictory to both the spirit and practice of competitive energy markets. It amounts to selective re-regulation, but only for particular power sources, which wouldn’t have to compete, they’d just have to have piles of fuel.

So does FERC have to do what DoE asks? No, but consider this: FERC has three commissioners (a quorum), two of which, including the chair, are Trump appointees. The chair is Neil Chatterjee, who was a staffer for Sen. Mitch McConnell, the Senate’s champion of coal. Chatterjee recently said:

I believe baseload power should be recognized as an essential part of the fuel mix. 
 I believe that generation, including our existing coal and nuclear fleet, needs to be properly compensated to recognize the value they provide to the system.

So, this market-wrecking plan to Make Coal Great Again is likely to happen.

This is an old-school Ayn Rand-style looter giveaway from a bunch of self-described free-market “conservatives” trying to rescue a dinosaur industry that is choking the world.

Just another issue that raises our anxiety level. It’s Saturday, and we need to dial it back, relax and stop thinking about how these Trump termites are quietly undermining everything. Grab a hot, steaming cup of Mystic Monk Paradiso Blend coffee ($15.99/lb.), find a quiet corner, put on the Bluetooth headphones and listen to Telemann’s “Concerto in D major for Violin, Cello, Trumpet and Strings”, TWV 53:D5. Here performed by the Bremer Barockorchester, recorded in a November, 2015 live performance at the Unser Lieben Frauen Church, Bremen, Germany:

Note the valveless trumpet played by Giuseppe Frau. It is an Egger (three-hole system) Baroque trumpet.

Those who read the Wrongologist in email can view the video here.

Facebooklinkedinrss

Saturday Soother – September 23, 2017

The Daily Escape:

SunndalsĂžra, Norway, best known for its aluminum factory, one of the largest in Europe – photo by Brotherside

WaPo reports that estimates say it will take about four months for electric power to be restored on Puerto Rico. You would hope that we could beat the estimate by quite a bit. What is the Congress’s plan to help out our Commonwealth?

Can you imagine living somewhere without power for several months? We had to do it once at the Mansion of Wrong, at the height of winter for 7 days. It got to 37°F one night inside the house. We now have a whole house generator.

What happens to the Puerto Rican economy if there is no power for multiple months? Can average people make a living? How will they pay the rent, or the mortgage?

Our first concern should be providing them with supplementary power. Generators and the fuel to power them must be among the first things we deliver to the island. They are the cheapest, fastest way to deliver temporary power while the basic infrastructure of power lines and cell towers are rebuilt. Fuel (mostly diesel) will need to be brought in via ship. Health care facilities need power to operate, and the basic elements of government requires it as well. With power, they can begin to restore normalcy, communications and water for citizens.

People will need some form of temporary housing. Businesses will need to sell products and services, and help keep people employed. It’s also not clear how law and civil order will stand up to months without power, or to a situation where people can’t get their basic needs met.

Anyone with resources, or family connections on the US mainland is going to move away, many will come here. Will Puerto Rican immigrants be seen by the GOP base as simply more illegals coming to use our welfare system?

Will the GOP remind their base that Puerto Ricans are US citizens? It isn’t certain that Republicans all will say that. Think about what that says about the America we live in today.

The scale of this disaster would be unfathomable and unacceptable on the US mainland. Will we step up as a country and help our brothers back to their feet? Or, will we do something half-hearted because they are the “other“?

Before you answer, remember that Flint Michigan still doesn’t have safe drinking water. Maybe getting the help you need is mostly about whether you (and your town) are the correct color.

Time to get soothed after another really tough week. Try to find a bag of Beanstock’s Shucker’s Roast coffee (only available at retail during the Wellfleet Cape Cod Oysterfest) but otherwise available at great Cape Cod restaurants like C-Shore Wellfleet. Then, brew up a hot, strong cuppa. Settle back, put on the Bluetooth headphones, and listen to Tchaikovsky’s Trio in A minor, Op. 50. This will take about an hour, but you will be greatly rewarded.

Tchaikovsky wrote this between December 1881 and late January 1882. It is the only work Tchaikovsky ever wrote for piano, violin, and cello. Here it is performed live at the New England Conservatory’s Jordan Hall in February 2013, with Livan on piano, Zenas Hsu on violin and Yina Tong on cello:

Those who read the Wrongologist in email can view the video here.

Facebooklinkedinrss